Air Pollution
Chapter 6
Air Pollution Problems
1. Urban air quality
2. Acid rain
3. Global warming
4. Ozone depletion
5. Hazardous air pollutants
Urban Air Quality
• Six substances of concern
Suspended particulates
SO2 sulphur dioxide: electricity generating plants
CO carbon monoxide: toxic, emitted by cars
NO2 nitrogen dioxide: cars and electric utilities
O3 Ozone: shields Earth from ultraviolet rays; forms smog with NO2
Pb Lead: nonferrous smelters, battery plants
• Harm produced
Bronchitis, asthma etc
Poor visibility
Corrosion
Acid Rain
Acid rain is a solution of sulfuric acid and precipitation that forms
in the atmosphere from industrial SO2.
• Harm produced
Lake and river ecological system
Retarded growth and increased mortality in forests
Corrosion
Discoloring
Structure deterioration
Global Warming
Greenhouse gas is a gas that helps the Earth retain heat from the
Sun.
Disagreement on the part of academia as to the effects of the
greenhouse gas effects (chiefly CO2).
Harm produced
• Coastal floodings
• Deserts
• Relocation of croplands and forests
Ozone Depletion
• Harm produced by reduced ozone layer
Skin cancer
Genetic mutations
• Chlorofluorocarbons (CFC)
Used in aerosol propellants, refrigerants, cleaning solvents
International measures to decrease the worldwide use of CFC
One of the successful international environmental policies
Hazardous Air Pollutants
• 1990: Clean Air Act of 1990 by the EPA
• 189 airborne chemicals targeted
• Human health is main concern
Pollution as Negative Externality
Definition. Costs created by producers or consumers, but paid by
others, are called external costs.
Definition. External costs attributable to each additional unit of
production are called marginal external costs (MEC.)
Definition. Actions resulting in harm done to somebody else are
called a negative externality.
Pollution is a negative externality produced by businesses, e.g.
steel plants.
Can We Do Without Pollution?
• NO
• Without pollution, we would have no steel, no rubber, no
electricity etc
• Major tradeoff: pollution vs industrial output
• The problem is not whether to have pollution, but rather how
much pollution can we afford to have: what is the optimal level
of pollution?
Market for Refined Oil Products
• Gasoline, kerosene, diesel fuel,
lubricating oils
• Marginal cost MC here is the
polluter’s private marginal costs
• External costs are not borne by
the pollutant
• Adding marginal external costs
to the private MC, we obtain
marginal social costs (MSC.)
Private vs Social Supply
• The distinction between marginal private costs MPC and
marginal social costs MSC is the distinction between private
and social supply
Definition. The sum of marginal private costs and marginal
external costs is called marginal social costs (MSC.)
• Without government intervention, the market is “unable to get
right” the relevant supply, which is social supply, i.e. MSC.
Efficiency Loss from Pollution
• Private optimum: 450 barrels
sold at $85
• Social optimum: 400 barrels
sold at $90
• Efficiency loss from
pollution is equal to the area
DCE
Efficiency Loss from Pollution
Definition. Marginal social cost minus marginal benefit, summed
over all units produced for which MSC>MB, is called efficiency
loss from pollution.
Efficiency loss from pollution occurs because the pollutants don’t
bear all costs associated with polluting the air, namely, they don’t
pay the external costs.
Efficient Level of Pollution
• Efficient level of pollution is not zero
• However, the economic benefits
associated with the pollution level
at 400 barrels are justifying the
eventual pollution costs
Is Government Action Necessary?
Definition. A resource that is free for all to use is called common
property resource.
Atmosphere is a common property resource!
The result is, too much pollution.
Solution: define private property rights to polluting the air.
Property rights can only be conferred by the government.
Coase Theorem
• Ronald Coase, a Nobel Prize-winning economist
Coase Theorem (a simplified pollution version):
The assignment and enforcement of property rights can lead
to the efficient level of pollution.
Coase Theorem: an Illustration
• Victims of pollution suffer health damages equivalent to
MEC (at each level of pollution)
• Hence, the maximum willingness to pay the polluters
to reduce pollution is MEC as well
• If polluters reduce pollution by 1 unit, they
• Save production costs = MC
• Lose revenues = MB
• Polluters are willing to reduce pollution by 1 unit if
they are paid at least MB-MC
• For all barrels between 400 and 450, MEC>[MB-MC],
which is why the pollution victims will stop paying the
polluters to reduce further when 400 barrels are reached
Coase Theorem: an Illustration
Case 1: Pollution victims have the right to clean air.
Polluters will be wiling to pay the victims as much as MB-MC,
and the victims will be willing to accept the “bribe” as long as
MB-MC>MEC, which is true for all units below 400.
Case 2: Polluters have the right to pollute
Pollution victims will be willing to pay the polluters to reduce
pollution as long as MEC>MB-MC, which breaks down for
units below 400.
Final Result: It doesn’t matter how the property rights
are distributed since the private negotiation process will
result in the same socially efficient outcome.
Coase and Government
• Coase theorem won’t work if transaction costs of
negotiation are not zero
• Reasons why transaction costs are not zero
Too many parties involved
Coordination difficulties
Bribes are illegal
Regulatory health concerns
• Realistically, we cannot rely on the private negotiation
process to resolve the issue of pollution!
Clean Air Act
• 1963-1990, Environmental
Protection Agency
• National Ambient Air Quality
Standards (NAAQS)
 Ambient concentrations:
concentrations of pollutant in the
atmosphere
 Establish upper limits on
concentration levels for particulates,
SO2, CO, NO2, O3, Pb
 Physical and time dimension: for
ozone it’s hourly 0.12 part per million
• Emissions limits
 Limits on emissions of CO, NO2,
hydrocarbons from autos, industrial
emissions
• Restricted technology
Autos with catalytic converters
Fuel-dispensing hoses for gas stations
where NAAQs for ozone are exceeded
Problems: uncertainty to manufacturers,
administration costs for EPA
• New source performance standards
Factories constructed after the law is
enacted are subject to more stringent
standards
Strong incentives not to replace old
equipment with new one
Clean Air Act
• Prescribed fuels
Oxygenated gasoline must be sold in areas where CO concentrations
exceed EPA limits
Officials in areas where ozone levels do not meet EPA standards must
provide incentives for increasing share of alternative fuel vehicles:
methanol, compressed natural gas, liquid petroleum gas, electricity
• Offset requirements
New factories’ pollution must be offset by pollution reduction in old
factories: offset exceeding addition
Size of offset depends on the extent to which ozone regulation is
violated
Clean Air Act
• Emissions trading
Emissions reduction credit is a permit to emit certain amount of pollution
Example: an oil refinery required to reduce SO2 by 100 tons a year, reduces
by 200. Gets 1 credit that it can sell to another polluter.
• Prevention of significant deterioration
Limits on rate of increase in pollution in areas where NAAQs were not
even violated
• Monitoring and compliance
Relegated to state and local governments since they are better informed
about local pollution
Clean Air Act: Effects
• 75% reduction in particulates due to reductions of smokestack emissions
• SO2 lowered due to stack scrubbers at electricity generating plants or switching to lower
sulfur fuels
• Nitrogen oxide down due to catalytic converters in motor vehicles
• CO reduction mostly due to emission control in autos
• Lead reduction due to phase-out of leaded gasoline
Environmental Regulation:
Emissions Taxes
Definition. A tax charged polluters for each unit of pollutants emitted.
A.C.Pigou (1877-1959) Pigouvian taxes establish the price a polluter pays per
each unit of emission.
Definition. The cost of abating or eliminating an additional unit of pollutants is
called marginal abatement cost (MAC)
Rationale: Pigouvian taxes decrease costs of emission reduction since they
play on marginal abatement cost heterogeneity among firms, while uniform
regulation is indifferent to such heterogeneity.example
Pigouvian Taxes: an Example
Marketable Pollution Permits
Definition. A permit that can be bought and sold that allows a
polluter to emit a specified quantity of a pollutant or pollutants is
called a marketable pollution permit.
Marketable pollution permits system:
1) Issue each plant two permits each allowing to emit 1 ton
2) Allow trade in permits
Total reduction will be achieved with the reduction levels
determined by the market.
Pollution Permits: an Example
Pollution Taxes and Permits: Summary
Pollution taxes: 8 tons reduced at $2300; government revenue
positive
Pollution permits: 8 tons reduced at $2300; government
revenue zero
Pollution permits are preferable since they are not associated
with tax distortions
However, the initial allocation of permits is a problem
Transaction Costs
Definition. The costs of finding willing buyers and sellers and
negotiating a mutually acceptable price are called transaction costs.
For trade in pollution permits to happen, there must be a margin
between the sell and the buy price.
If transaction costs are high, trade won’t take place.
Pollution Taxes
• How do you determine the size of the Pigouvian tax?
• If permits are auctioned off rather than allocated free of charge,
Pigouvian taxes have no advantage over tradable pollution
permits.
Global Warming: Emission Permits
• 1997: Kyoto, UN conference on reducing CO2 emissions
• Target: 15%-25% reduction by 2010
• 130 countries granted exemption, including China and India, so US hasn’t signed yet